Common Tragedies

Thoughts on Environmental Economics

Michael Bloomberg, economist

Posted by Daniel Hall on November 2, 2007

As reported (and rejoiced over) elsewhere, the New York City mayor will be calling for a national carbon tax in a speech later today. His full speech will apparently call for four key measures to address climate change: a price on emissions (preferably a carbon tax), more funding for energy-related R&D, an end to agricultural subsidies for biofuels, and an increase in CAFE standards. I’ll bet you could get most economists solidly behind at least three of those four proposals (and some would support all four). Excerpts from his prepared speech below the jump:

…I think we need a strategy that embraces four basic principles, and I’d like to briefly outline them today. First, we need to increase investment in energy R & D. Right now, we’re spending just one-third of what we were in the 1970s.

Second, we have to stop setting tariffs and subsidies based on pork barrel politics. For instance, Congress is currently subsidizing corn-based ethanol at 50 cents a gallon – and you can argue that’s good agricultural policy, but you can’t argue that it’s good for consumers or the environment. Because it isn’t. Consumers pay more for food, and producing corn-based ethanol results in much more carbon dioxide than producing sugar-based ethanol. But are we subsidizing sugar-based ethanol? No! We’re putting a 50-cent tariff on it. Ending that tariff makes all the sense in the world, but for the politics.

Third, we have to get serious about energy efficiency – and the best place to start is with our cars and trucks. In 1975, Congress passed a law requiring fuel efficiency standards to double over 10 years, from 12 miles a gallon to 24, with incremental targets that auto manufacturers were required to meet. But since 1985, Washington has been paralyzed by special interests.

Fourth and finally, we have to stop ignoring the laws of economics. As long as greenhouse gas pollution is free, it will be abundant.

To raise the cost of carbon, we can take either an indirect approach – creating a cap-and-trade system of pollution credits – or a direct approach: charging a fee for greenhouse gas pollutants. The question is: Which approach would be more effective? I’ve talked to a number of economists on this issue, people like Gilbert Metcalf at the National Bureau of Economic Research and every one of them says the same thing: A direct fee is the better approach – but for the politics.

Both cap-and-trade and pollution pricing present their own challenges – but there is an important difference between the two. The primary flaw of cap-and-trade is economic – price uncertainty. While the primary flaw of a pollution fee is political, the difficulty of getting it through Congress. But I’ve never been one to let short-term politics get in the way of long-term success.

For the money, a direct fee will generate more long-term savings for consumers, and greater carbon reductions for the environment. And I don’t know about you, but when the economists say one thing and the politicians say another, I’ll go with the economists.

Of course, I also understand that you can’t let the perfect be the enemy of the good. Whether it’s a direct fee or cap-and-trade, we can’t be afraid to try something – to do something — to act. …

Note: Gilbert Metcalf was one of the presenters at the Brookings Institution event we’ve been discussing this week. The paper that he presented on a carbon tax can be found here, as can Rob Stavins’ companion paper presenting the case for cap-and-trade.

One Response to “Michael Bloomberg, economist”

  1. […] by Evan Herrnstadt under 2008 election, My group blog, carbon tax, climate change, ethanol   Daniel Hall beat me to the punch at Common Tragedies on Michael Bloomberg’s energy […]

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